Einhorn Questions Prompt Selloff at Herbalife

When David Einhorn speaks, investors around the markets listen. So when he asks critical questions on a company’s earnings calls, shareholders apparently panic.

That seems to be the case with Herbalife, whose shares plunged more than 20 percent by Tuesday afternoon, to $55.90, tripping a number of market circuit-breakers on the way.

It couldn’t have been because of Herbalife’s first-quarter earnings. The company reported a 21 percent jump in global net sales, to $964.2 million. And its net income rose 22 percent, to $108.2 million.

Instead, Tuesday’s decline probably arises from fears that Herbalife is the latest target of Mr. Einhorn’s hedge fund, Greenlight Capital. During the company’s earnings call, Mr. Einhorn took to the phone to ask a few questions of Herbalife management. One query centered on how the company accounts for particular kinds of distributors, and why that was no longer disclosed in annual reports.

Here’s a transcript of the exchange, courtesy of Bloomberg:

Mr. Einhorn: Okay. Good. One last question, when you had your previous 10-K, you disclosed three groups of distributors at the low-end. You called 29 percent self consumers, 57 percent small retailers, and 14 percent potential sales leaders and then that disclosure did not repeat in the subsequent 10-K. So, I got two questions, first of all how do you track that and how do you characterize and know which ones are which? And second, why did you stop disclosing that in the last 10-K? Is that something that you stopped tracking or just stopped disclosing?

John Desimone, Herbalife’s chief financial officer: David, hi, this is John. The criteria for grouping distributors into different classes was based off of their volume purchases and we are making assumptions that people below of certain volume. While doing the business, they were buying soft consumption and I don’t remember the exact amounts, but I can get it to you after the call, as how we delineated between the three classes.

And one the reason that we took out of the 10-K is a change in C.F.O. from which to me I didn’t view it is valuable information to the business or to the investors. However, we can easily provide the exact same breakout going forward if you would like [indiscernible] into our investors. Again, I don’t remember the exact delineation between the three classes, but I can certainly get it to you. Our objective is to be completely transparent, so.